The Walking Co. Files for Chapter 11 Protection

 

The comfort shoe chain blamed the filing on its inability to rework and manage exorbitant rent terms signed during a heady expansion period. TWC said it will be able to use bankruptcy to close underperforming stores under a “right sizing” strategy and expects to file a “pre-negotiated” reorganization plan within weeks.

The company acquired The Walking Company out of bankruptcy in early 2004 when it had 70 stores.  Big Dog changed its name to The Walking Company Holdings, Inc. in Q2 last year as TWC came to make up a strong majority of its business. 

The bankruptcy filing in the U.S. Bankruptcy Court in Santa Barbara, CA listed assets of $103 million and liabilities of $76 million. Trade vendors landing on the top 20 unsecured creditors list included Deckers Outdoor, owed $2.35 million; Dansko, $652,771; Ecco USA, $174,227; Aetrex, $83,413; and MBT (Masai USA Corp.), $74,384. Many of the top unsecured creditors were landlords, including Property Group, owed $1.54 million; General Growth, $1.2 million, and Westfield Corp., $573,289. TWC is about 56% owned by its chairman, Fred Kayne, according to court papers.

The company has obtained debtor-in-possession financing from Wells Fargo Retail Finance and Wells Fargo is also interested in providing exit financing, according to court documents. It said it had a commitment from an investor group led by Kayne Anderson Capital Advisors for $10 million in new capital to be provided to the reorganized company. That group is led by Richard Kayne, the brother of Fred Kayne.

“We believe our business model is sustainable in today's world, despite declining consumer spending and mall traffic at present,” said Andrew Feshbach, CEO of TWC, in a statement. “However, the unfortunate timing of our rapid expansion caused us to enter into lease commitments at what now appears to be the high water mark for retail space.” 

The company detailed its collapse in a court filing, noting that after encouraging results from an initial expansion test in 2005, it entered into a period of expansion, opening approximately 140 new stores and more than doubling in size from 2006 to 2008. This included the acquisitions of Footworks in August 2005 and Steve’s Shoes in January 2006.

During this period, TWC agreed to the high rent levels then commanded by landlords. As a result of the expansion, TWC's net sales increased from $179.1 million in 2005 to $218.6 million in 2006 and $233.3 million in 2007. Gross profits improved from $98.8 million 2005 to $116.9 million in 2006 and $122.4 million in 2007.

However, when the economy in general — and the retail business in particular  — went into “serious decline” in 2008 and 2009, TWC's business suffered. Sales continued to climb to $241.5 million in 2008 but were lower than expected. Gross profits slid to $117.5 million last year. Due to the high rents combined with significant expansion costs related to growth and certain restructuring costs, TWC generated a loss from operations of $5.3 million in 2008. The company said that mall traffic and retail sales have continued to be weak throughout 2009. Through the third quarter of 2009, the company's gross sales were $126 million and the company generated a loss from operations of $14.1 million.
In the court filing, TWC said it concluded in early 2009 that it would not be able to weather the continuing economic recession and depressed retail environment without strengthening its financial capital position. The company said it “devoted considerable effort” to seeking a capital infusion and exploring the sale of the company, but those efforts failed primarily due to the company's now-current lack of operating profits and over-market rents prevalent in its leased portfolio.

As a result, TWC then turned its attention to developing an operational turnaround plan. The key elements included cost-cutting measures, financial restructurings and efforts to renegotiate lease obligations. The company said it was successful in implementing the cost-cutting initiatives and contemplated financial restructuring. In early 2009, the firm had terminated 500 employees and cut salaries in an effort to free up $10 million to $15 million in cash flow. It has already started closing its Big Dog clothing store chain, which once had about 200 stores, and is set to close its final 8 locations by the year-end.

But TWC said it has been “largely unsuccessful” at achieving a satisfactory reduction of lease terms necessary to restore the company to profitability and “”now finds itself burdened with substantially over-market rents.”

The company was seeking to start store closing sales at the 90 unprofitable locations last week to take full advantage of holiday shoppers, subject to court approval. With only a few weeks remaining in the holiday shopping season, the company said it has pre-printed store closing signs and was ready to begin the wind down immediately. It also noted that Wells Fargo Retail Finance has conditioned the DIP financing on the approval of store closing sales no later than December 11. The aggregate monthly rent at those 90 locations alone is approximately $1.1 million.

Lawyers said that if the store closing procedures commenced by December 11, it expects annual sales in 2009 will be $193 million. After the store closings, TWC expects to emerge from Chapter 11 protection in early 2010 with a profitable operation and generating $140 million in annual revenue.

The company was once traded on the Nasdaq. But with fewer than 100 shareholders and a low market capitalization, the company decided it could save money by withdrawing from the exchange in April.